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Chile: Time to Take Notice

The magnitude 8.8 earthquake that struck Chile in February of 2010 was the sixth largest quake on record since 1900, and it caused an estimated $30 billion in damage (the country has a $164 billion economy). But that didn’t stop the Chilean market from gaining 28% over the past year.

And while GDP contracted 2% following the disaster, it didn’t stop the Chilean economy from growing 5.2% last year, the fastest pace in 5 years.

And now Chile is expanding at an even faster speed: GDP rose 9.8% in the first quarter this year – the fastest pace in 15 years.

But it’s not just that Chile has managed to recently outpace other major Latin American economies. And it’s not just that Chile is expected to post the third fastest growth (at 5.9%) in South America this year (behind Peru and Argentina, according to the IMF).

It’s about the advances behind the numbers. On the most recent Forbes Best Countries for Business list, Chile ranked #6 for market performance, #7 for trade freedom (the country currently has 57 regional or bilateral trade agreements)…and #1 in personal freedom.

Freedom matters. Economic freedom allowed Chile to withstand the global economic downturn. And the country has made improvements in business freedom, fiscal freedom and monetary freedom, according to the Heritage Foundation 2011 Index of Economic Freedom. The country now ranks 11th in the world in overall economic freedom.

That’s not to say there aren’t problems. The pace of growth has caused concern that the economy is overheating. And consumer prices are expected to rise 3.6% this year (according to the IMF), making inflationary fears a common dialogue: “excess demand in Chile is the highest in Latin America. That excess demand is being accommodated in two ways: inflation and exports”, according to Moody’s Analytics.

In reality, those fears may be overblown. The Chilean central bank has an official target of 3% annual inflation, plus or minus 1% over a one-year horizon…meaning inflation expectations are not totally out of line. And core inflation (excluding food and energy) rose .3% last month.

And the government isn’t worried; the central bank’s chief economist told a recent conference that growth is not leading to excessive inflationary pressure (even though the bank projected that inflation may reach 4.3% by December).

The bottom line: Chile is the world’s largest copper exporter. And it is South America’s fifth largest economy. And it ranks fifth on the soundness of its banks in the World Economic Forum’s Global Competitiveness Report. And today it ranks among top performers based on relative strength in a portfolio of emerging markets.

Indicators for iShares MSCI Chile Investable Market Index Fund (ECH) recently signaled a buy; the fund is up 38% over the past year, and is currently in a long-term upward trend. A cautionary note: this fund is not heavily traded, so watch the spread carefully.


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